I think we all know the debt ceiling issue will be resolved before Aug 2nd, likely not until Sunday night in order to make this whole dog and pony show appear even more dramatic. They are after all essentially the same political party with some variance in rhetoric (with the exceptions of the Ron/Rand Pauls and alike). How will the metals react? I can’t help but think a short term correction is in place as many investors will likely react to the supposed spending cuts going forward as bullish for the USD and equities, with less safehaven demand in the metals. It is very possible to see gold pullback to $1,550 and silver to $35-$36 or so in early to mid-august before breaking out in the last four months of the year, reaching my personal targets of $1,800-$1,900 and $55-$60. It is, however, a longer term positive for the precious metals, providing possibly the last opportunity to invest in physical bullion or mining related equities. The rationale behind this includes a pickup in investment demand driven by the following:
- Position Limits are supposed to be enacted by September, likely with a two or three month window to reach full compliance. Due to the small size of the silver market, commercial short covering could send the metals higher, particularly silver. This of course assumes they don’t take the obvious manipulation OTC. In other words, I wouldn’t bet the farm on this catalyst alone.
- Indian Wedding Season – This is obvious albeit important nonetheless as supply coming off the market is bullish.
- Pan-Asia Exchange – Although this could take some time to have a real impact on the supply side, it will have to now start warehousing silver following the commencement of the first silver contract being traded last Sunday. As more contracts trade, more inventories will bring supply off the market as well investors wishing to take delivery (This should be very bullish long term as they have 1,000oz contracts available for physical delivery, opposed to the 5,000oz contracts at the CME).
- Announcement of QE3/Operational twist or whatever it will be called. Unlike years past, foreigners will not keep buying our treasuries especially with a negative real yield (CPI is one of the biggest jokes out there). So the FED will need to fund some of our deficit spending (projected to be >2T from Aug 2 – EoY 2012). Bernanke will also try to stimulate the economy for the upcoming 2012 election, if he has any hopes of getting re-elected. It is blatantly obvious, politicians and those alike will stab their own mother in the back in order to get re-elected/reappointed. With recent economic data being released, showing much weaker growth than initially forecast, the Fed will be even more aggressive than it otherwise would have been.
- More debt issues in the EU
- Physical tightness in the silver market
- Continuing structural changes in the Commitment of Traders Report – The most recent weeks adjusted data below
Analysis: As previously mentioned, I expect the precious metals to take a hit, which also seems to be what the largest commercial traders think as well (although possibly for a different reason). As devious and corrupt as they may be, they are still relatively smart. Should silver suffer a correction I’m expecting, the commercials are likely to start covering their short positions thereafter, which I think will begin to show up by mid to late August. In other words, the continued structural change in the silver market should be evident by late August – early September.
